ASEAN business opportunities

Standard economics tells us that a trade war can only hurt both sides. How can it be a win-win situation? This is obviously a textbook question. The real world is much more complicated than textbooks. For example, the trade war of US President Trump is not a typical trade war. Freedom is a value that Americans cherish, and the US government will not openly violate the principles of free trade. Trump said that he wanted to reduce the US$100 billion trade deficit with China. That was for American voters, because this was the "main reason for his election." If he said that because China's trade surplus with the United States was too large, he wanted to Increasing the tariff rate on Chinese products is obviously "politically incorrect." This is unspeakable, and it will not be endorsed by other countries in the world. His reason is that China's trade with the United States is "unfair." Obviously, free trade is fair free trade. If it is not fair, it will not be "defended".

    So, what is unfair? One is that Chinese companies steal patented technology from American companies or use market access benefits to force American companies to transfer patented technology; second, the Chinese government has provided large subsidies to Chinese companies, resulting in overcapacity and dumping abroad, leading to low prices in the world market; 3. The Chinese government blocked or restricted the free flow of Internet data, which prevented American companies from conducting business in China, resulting in a loss of approximately US$400 billion; fourth, China restricted American companies’ access to the Chinese market, such as in the fields of communications, credit cards, and movies. Obstructed.

    From a purely theoretical perspective, these accusations of "unfairness" are justified. The free trade assumed by the textbook is free trade under fair market competition. A fair and effective market must protect intellectual property rights. Different companies cannot be treated differently, free access to the market cannot be restricted, and free access to the market cannot be restricted by restricting the flow of data. Regarding these principles, the Chinese government, which has held high the banner of free trade in recent years, will not have any objections. The only question is whether these accusations are true; or they are true, but they are exaggerated as an excuse for trade protectionism. The latter situation is more likely.

    After 40 years of reform and opening up, China is basically a market economy country. But it's not perfect yet. The Third Plenary Session of the Eighteenth Central Committee of the Communist Party of China proposed that “the market plays a decisive role in the allocation of resources”, indicating that the Chinese government must continue to carry out market-oriented reforms and remove those bad rules and behaviors that do not conform to the principles of the market economy, including intellectual property rights. Infringements, treat different companies differently, restrict the free entry of the market, and restrict the free flow of data. From this point of view, the US accusation of China's "unfair" trade is precisely the target of China's reforms, and there is no conflict. If the U.S. is really not a drunkard and not drinking, then China's correction of these errors will not only eliminate the "unfair" accusations made by the United States, but it will also be good for China itself. Because a more perfect market economy is good for China.

      In the field of intellectual property rights, China is already at the forefront of the world. Although the quality of patent applications needs to be improved, the number is already the world's first. China's major industries have developed to the point where they are dominant in the world in terms of scale and technological level, and most of them rely on self-developed intellectual property rights. We cannot rule out that individual Chinese companies "steal" technology from other countries' companies, or require technology transfer in joint ventures with foreign companies, but this does not constitute a strategic technological lead. Therefore, it cannot become China's national strategy. From the perspective of China's national interests, strengthening the protection of intellectual property without weakening it is beneficial to Chinese enterprises and China's economic development. If China’s intellectual property rights are to be protected not only domestically but also worldwide, the intellectual property rights of all enterprises must be protected, and the world system for protecting intellectual property rights must be maintained. Only then can China’s intellectual property rights be respected abroad. Therefore, to stop the theft of technology and not require foreign companies to exchange technology for the market is not only harmless to China, but beneficial.

    Regarding the Chinese government's subsidies to enterprises, it mainly refers to subsidies to state-owned enterprises. In the Chinese steel industry and aluminum industry targeted by the United States, there are two types of enterprises, state-owned enterprises and private enterprises. There is competition between them. It is impossible for private enterprises to receive government subsidies. State-owned enterprises receive government subsidies because they are inefficient and cannot survive without subsidies; they also have government resources. For example, in the aluminum industry, China Aluminum Corporation is a state-owned enterprise known as the "loss king", with losses of more than 45 billion yuan for eight consecutive years; in 2014 alone, it lost 16.2 billion yuan and received government subsidies of 823 million yuan. In fact, all the subsidies received by state-owned enterprises are not just a little bit on the books. Almost all state-owned enterprises enjoy subsidies for free use of state-owned land and subsidies for obtaining loans at low interest rates. According to research estimates by Tianze Institute, the return on book net assets of state-owned and state-controlled industrial enterprises from 2001 to 2013 was 9.08%, but after deducting the unpaid rent, the difference between the preferential interest rate and the market interest rate, and the unpaid natural resources For rents and government subsidies, the actual return on net assets is -3.67%, which means that if these subsidies are not available, they are loss-making.

      This has become the main reason for the overcapacity of China's steel and aluminum industries. In these two industries, it is impossible for private enterprises to have overcapacity. Once the overcapacity continues, they will lose money and go bankrupt. But even if state-owned enterprises lose money, they can maintain excess capacity due to free land, low-interest loans, and government subsidies. Therefore, the overcapacity of the steel and aluminum industries is not only a problem of international trade, but first of all, a problem of China's domestic market. Therefore, an important task of the supply-side structural reforms that began in 2016 is to "de-capacity", which also means reducing the production capacity of state-owned enterprises. However, because state-owned enterprises have deeper government resources, although the government-led capacity reduction has reduced the capacity of some state-owned enterprises to a certain extent, in many places, the government assigns the indicators of capacity reduction to private enterprises that lack political background, making The overcapacity reduction has gone to the opposite side, compressing the production capacity of highly efficient private enterprises.

    From this point of view, the fundamental solution to the problem of excess capacity requires state-owned enterprise reform, and the ultimate goal is to withdraw from all profitable fields. The first thing to do is to remove the monopoly privileges and government subsidies of state-owned enterprises. If the free use of state-owned land and low-interest loans are regarded as a low-price monopoly of buyers, this is exactly the "administrative monopoly" proposed to "break" in the report of the 19th National Congress of the Communist Party of China. In this way, the demands from the United States are in line with the inherent needs of the Chinese economy and the reforms the Chinese government wants to carry out. The problem of overcapacity in China's steel and aluminum industries can only be finally solved in a fair competitive environment without government subsidies, allowing those low-efficiency loss-making companies to withdraw from the market. If the administrative monopoly is completely broken and government subsidies are eliminated, it will not only solve the problem of overcapacity in the steel and aluminum industries, but will also bring about a significant economic acceleration at the macro level. I have estimated that if the actual losses of state-owned enterprises are reduced to zero, the net assets of state-owned enterprises (financial and non-financial) of 52 trillion yuan in 2013 will also increase the GDP growth rate by 3.3 percentage points.

    Similarly, ensuring the free flow of data is also good for China. The Chinese government is concerned about cyber security, and it is undoubtedly right to emphasize the country's cyber sovereignty. However, because the Cyber Security Law lacks effective restraints on network management departments, they expand their powers, which actually weakens and violates Article 35 of the Constitution, and greatly reduces the data space in normal life and work. . For example, in academic, business and life fields that have nothing to do with politics, if you don’t use VPN, scholars cannot connect to overseas academic websites, such as Google Scholar; tourists cannot use Google Maps, and cannot use overseas commercial websites, such as amazon, airbnb; you can't even log in to the website of a foreign embassy in China. Not to mention, unconstrained network control has actually suppressed criticism of government departments and the exposure of corruption, and it has obviously caused profound harm to Chinese society. This will also affect foreign residents or companies in China, making them unable to live and work normally.

    The Fourth Plenary Session of the 18th Central Committee of the Communist Party of China emphasized the need to "rule the country in accordance with the Constitution", which includes guaranteeing citizens' constitutional rights. This must first guarantee the rights of Article 35 of the Constitution. China’s Cyber Security Law also stipulates that “the state protects the rights of citizens, legal persons, and other organizations to use the Internet in accordance with the law,... and guarantees the orderly and free flow of online information in accordance with the law.” In fact, the Chinese government has also recently done this. Adjustment. According to my experience, many overseas websites that were not easy to use in the past have become easy to use. Including Google Maps, Google Translate, amazon, airbnb, some academic websites, TV websites in Western countries such as CNN, etc. This shows that the Chinese government has become more and more aware that in addition to causing huge damage to China with the use of firewalls to restrict the flow of data, even today with such advanced information technology, it cannot achieve their intended purpose. China's constitution and laws, as well as the recent adjustments of the Chinese government, are not too far behind the free flow of data required by the United States. In general, the free flow of data is even more important than the freedom of trade, and the unhindered exchange of ideas will enable China to more fully stimulate technological and institutional innovation.

    Regarding the issue of free market entry, the situation is slightly more complicated. Telecommunications and banking are originally administrative monopoly industries, so the first task is to break the administrative monopoly and open the market to private enterprises. This is also the reform goal of the Chinese government in recent years. In addition to proposing to “break the administrative monopoly”, the “Nineteenth National Congress of the Communist Party of China” also proposed “fully implement the market access negative list system, clean up and abolish various regulations and practices that hinder a unified market and fair competition, and support the development of private enterprises,... …" In 2018, the market access negative list system has been fully implemented. In the negative list, there are no restrictions on the entry of commercial banks and basic telecommunications services, so all market entities, including Chinese private enterprises and foreign-funded enterprises, can enter. Mr. Liu He also emphasized at the Davos Forum that the Chinese government will soon implement the opening up of the financial industry this year. However, the negative list does have restrictions on entry into the film industry, which is mainly due to ideological considerations. It is this consideration that hinders the development of Chinese films as an art category and lacks international competitiveness. If the control is deregulated, the Chinese film industry will obviously have an advantage in the Chinese market, and it will not be afraid of competition from Hollywood.

    Recent comments on the so-called "China-US trade war" have paid more attention to the "war" aspect. Looking back at China's accession to the WTO and the WTO negotiations, a better approach is to "turn war into talk." Through negotiation, the conflict of trade interests between countries will actually lead to a better system balance and achieve a win-win result. WTO rules require China to lower tariffs and open up the domestic market. At first, Chinese people generally thought that the wolf was coming and that Chinese companies could not compete with foreign companies. As a result, because China has promoted domestic market-oriented reforms by means of joining the WTO, the entrepreneurial spirit of the Chinese people has been radiated. Chinese companies have achieved great success in the domestic market and continue to have a high surplus in international trade. Foreign companies have also benefited from the expansion of China's huge market. In this context, a Chinese miracle that lasted for 40 years has appeared, which has also made China more confident. In the face of pressure from the United States, the Chinese government’s symmetrical response is cautious. Taking this opportunity to further promote domestic market-oriented reforms, liberalizing the domestic market is even more important, and at the same time eliminates the "excuse" for the United States to initiate a trade war. And this move is obviously much less risky than joining the WTO.

    If China removes those bad rules and practices that violate the principles of the market economy, such as abolishing subsidies and breaking monopolies, what will be the result? China's economy will have a faster development and become more internationally competitive. So, will China's trade surplus with the United States decrease? No, it will only increase. This is because although state-owned enterprises have received government subsidies and low-cost resources, their efficiency is lower and the average cost is still higher than that of private enterprises without government subsidies. For example, in 2016, when Aluminum Corporation of China suffered a loss, the net profit of shareholders of China Hongqiao Group, also an aluminum manufacturer, was approximately 5.1 billion yuan. In the steel industry, in the first three quarters of 2016, the sales profit rate of private enterprises was 3%, which was significantly higher than the industry average of 1.73%. If the administrative monopoly is broken, such as breaking the bank monopoly, the deposit and loan interest rate differentials of commercial banks will be narrowed by 0.5 to 1 percentage point; breaking the oil monopoly, the pre-tax gasoline retail price will be reduced by 21% (according to 2015 data); this Will reduce the resource cost of the entire economy. Therefore, if the Chinese government continues to promote market-oriented reforms, and state-owned enterprises have gradually withdrawn from the industry, and replaced by more efficient Chinese private enterprises, coupled with lower resource costs, they will have a more competitive advantage in international trade. Thereby it is possible to expand the trade surplus with the United States.

    In this way, doesn't it run counter to Trump's goal of reducing the trade deficit by 100 billion US dollars? In fact, we must bear in mind that Trump is a businessman and calling high prices is his customary strategy. As I said earlier, he is telling the voters, and he does not really want to achieve this goal. Moreover, in fact, maintaining a certain level of trade deficit is good for the United States. Why is this? Because, in a broader sense, if the dollar is also regarded as a commodity, the United States does not have a deficit. In fact, the dollar is still a commodity with the highest profit margin. It is said that the cost of printing a one hundred dollar bill is four cents, and the rest is the so-called seigniorage. What's more, in more cases, a large amount of trade does not require cash, but the number shown in the account has a higher seigniorage rate. Although in order to ensure the operation of the entire monetary system, the United States also needs other supporting facilities, such as security and credit protection, the highest cost is only 20%. No product can make an 80% profit margin. Isn't this a good deal?

    Of course, this income is only the income of the US government, not the income of private enterprises. However, it is not difficult to transfer this seigniorage income to the private sector, as long as the tax rate is reduced. The effect is not only to reduce the amount of dollars corresponding to the tax burden of enterprises, but also to bring about the macroscopic results of stimulating private investment and even foreign enterprise investment. The Trump administration’s tax cut reforms a few days ago have achieved obvious results, which has already explained the problem. Many American companies, such as Apple, and foreign companies, such as Toyota, have already expressed their intention to make large investments in the United States. Where there is investment, there is employment. Isn't this a better way to "bring work back to the United States"?

    Just transferring the proceeds of a large amount of seigniorage directly to the private sector will somewhat conflict with Trump's other goal, which is to strengthen the U.S. armaments. Why is this? Because the US defense expenditure mainly depends on seigniorage revenue. In 2016, the per capita defense expenditure of the United States was US$1,892, which was much higher than the average level of US$151 in other countries. The portion of U.S. military expenditure that exceeds the per capita level of other countries in the world is about 562.3 billion U.S. dollars. I call it the "imperial cost." According to many years of data, this part is basically the seigniorage of the US "selling" dollars through the trade deficit. However, the U.S. dollars sold are foreigners’ claims on the United States. Although they can be used in transactions with non-Americans, there are still certain limits. Therefore, the normal cycle is for foreigners to use trade to earn US dollars.

Yuan to buy American assets. Therefore, we see that the US trade deficit and capital surplus are almost symmetrical graphs centered on the X axis. See below. In other words, through capital inflows, the United States has recovered the U.S. dollars that flowed out through the trade deficit in order to maintain a balanced distribution of U.S. dollars in the world.

      Since the 2008 US financial crisis, the credibility of US financial assets has dropped significantly, capital inflows have decreased significantly, and the trade deficit has also decreased in the same trend. The reasons for the symmetry of trade deficit and capital surplus may need a doctoral dissertation to explain, here is not the table below. The reduction in the trade deficit and the corresponding reduction in U.S. seigniorage revenues will not be able to fully meet the needs of the military budget. As shown below. Before 2008, the capital account surplus was greater than the US military budget, and after that, it was lower than the military budget. This puts pressure on the US finances. This is the financial reason why the United States has contracted its global strategy under President Obama.

      Simply put, since a large part of the United States' national income comes from seigniorage, and the trade deficit is the sale of dollars, when the trade deficit is large, the fiscal situation of the United States is better; when the trade deficit is small, the fiscal situation is worse. See below. The US fiscal deficit moves almost symmetrically in the opposite direction to the trade deficit. In the figure below, when the trade deficit was the largest in 2006, the fiscal surplus was also the largest; when the trade deficit in 2009 was the smallest, the fiscal deficit was also the largest. Therefore, from the US fiscal perspective, a certain scale of trade deficit is a good thing.

      In the US fiscal expenditure, the largest part is military expenditure. With the reduction of taxes and seigniorage in the United States due to the constraints of the economic environment and international trade, the military budget is the most affected. Therefore, Trump's goal of reducing the trade deficit is inconsistent with the goal of expanding US armaments. Maintaining an appropriately large trade deficit helps to preserve the strong armaments of the United States. However, if the seigniorage revenue brought by the trade deficit is transferred to the private sector through tax cuts, it will also limit the expansion of U.S. armaments. However, it should be noted that the expansion of arms or the arms race does not necessarily benefit the United States. And if the seigniorage income brought by the trade deficit is used for tax cuts, it may be a real benefit to the United States. This is because the defense budget has an appropriate size, and its purpose should be to defend the country’s territory and interests. If it is too much, it will distort the country's behavior.

    If the army is too strong, it will easily resort to war to solve the problem. The shortcoming of the American political system is that it cannot restrain external state behavior. In most cases, only the current cost and benefit are used as the standard, and misjudgments often occur. Therefore, after World War II, the United States repeatedly made mistakes on international issues, especially on war issues. It is said that when the troops were sent to Vietnam, only three people in the United States knew about Vietnam. The Iraq War cost hundreds of thousands of Iraqis and 4,500 U.S. soldiers’ lives, but no weapons of mass destruction were found as an excuse to serve. The U.S. Middle East strategy is a strategy that continuously solves the problems it creates. For decades, the Middle East has been restless, and it has also disturbed Europe. In order to fight against Iran, the United States supported Saddam; in order to fight the Soviet Union, the United States supported Bin Laden; in order to fight against Assad, the United States supported the "Islamic State." All these forces supported by the United States later became enemies of the United States. Perhaps it is precisely because of excessive military expenditure that the error was implemented. Therefore, the issue of US international security is not too little military expenditure, but too much military expenditure.

    Too much military spending is due to the role of military industry interest groups in the political structure of the United States; and this group also depends on excessive military spending to survive and develop. It is the existence of the Pentagon-Military-Industry Group-Military-Industrial Area Iron Triangle that makes the U.S. political structure biased towards creating tensions and the use of force in international decision-making. Originally, US military expenditures have gradually decreased after the end of the Cold War, but the outbreak and continuation of the Afghanistan War and the Iraq War have increased the cost of "overseas emergency military operations" by more than tens of billions to 180 billion U.S. dollars each year on top of conventional military expenditures. Therefore, to cut military expenditures is to weaken an interest group that reaps the benefits of war at the expense of the overall interests of the United States, which is also to reduce further military expenditure requirements. The real interest of the United States is to return to a balanced international strategy and reduce errors in international strategy; at the same time, it will join forces with the world’s major powers to disarmament and create the prospect of permanent world peace. It is in the long-term interests of the United States to use reduced military expenditures in tax cuts to increase the competitiveness of American companies.

    Therefore, if China continues to carry out market-oriented reforms and engages in fairer trade with the United States, China’s trade surplus will be even greater; if the United States can maintain a considerable trade deficit in fair trade with China, and increase seigniorage revenue For tax cuts, not military expenditures, U.S. investment will increase and employment will increase; if Chinese capital is attracted by the low tax rate to invest in the U.S., if U.S. capital enters the more open Chinese market, there will be a gap between China and the United States. The economic relationship between them will be closer, and they will not become military opponents. In the long run, American industries will benefit from low tax rates and remain more competitive, thereby reducing the international trade deficit. At that time, China’s domestic market will become significantly larger than that of the United States and become the mainstay of American companies. overseas market. In China, the financial, telecommunications and other service industries will become more mature after being tempered by competition, and the renminbi will be more credible. This will also enable China to gradually and steadily shift to an economic model with low trade surplus and even trade balance. This is a win-win prospect.

    Is this politically feasible? A little bit. It should be understood that Trump's threat to further increase tariffs on US$100 billion of Chinese products and China's reciprocal response are all bids. Calling a high price is only a means to achieve the bottom price in the heart, not the end itself. Trump's goal is to open up a larger market in China. As mentioned earlier, the Chinese government has long established strategic guidelines for protecting intellectual property rights, breaking administrative monopolies, maintaining fair competition, and continuing to open up to the outside world, and has issued specific rules and policies on fair market access. The Chinese government only needs to speed up this pace or implement a number of specific cases, and it can brighten Trump's face and show that these measures are not driven by American pressure, but have long been considered and acted. If this judgment is true, Trump will have a chance at the beginning of the trade war, and a larger Chinese market will be revealed to American companies. Trump also knows the alternative relationship between the military budget and tax cuts, but he explicitly promoted tax cuts and tried every means to reduce military expenditures, such as asking Japan to bear more military expenditures for US troops stationed in Japan, and demanding a quick withdrawal from Afghanistan. , Which shows that he thinks tax cuts are better than a strong army. If both parties are aware of these economic and political interests, negotiations will not be too difficult.